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What's behind Alberta's startling reversal of fortune? Hint: It's oil prices

What's behind Alberta's startling reversal of fortune? Hint: It's oil prices

CBC
Thursday, December 2, 2021 9:13 AM GMT

This column is an opinion from Trevor Tombe, a professor of economics at the University of Calgary. For more information about CBC's Opinion section, please see the FAQ.

Alberta's latest budget update opened with what is surely one of the greatest understatements in provincial fiscal history: 

"The Alberta government fiscal situation," it read, "has changed materially from the forecast presented in Budget 2021." 

This "material change", however, was one of the most significant improvements in government finances that Alberta has ever seen in its 116 years.

The government now projects the deficit for 2021/22 to fall from $18.2 billion to $5.8 billion — which, though still large, would be the smallest deficit since oil prices tanked in late 2014. For perspective, this $12.4 billion improvement is the equivalent of over $2,800 per Albertan. Adjusted for population and inflation, this is the largest year-over-year improvement in Alberta history. And as a share of GDP, it's the largest since 1987.

It's a startling reversal of fortune.

Uncertainty remains, of course. But even despite recent oil price declines — which are down roughly 20 per cent this month due to concerns around the new COVID omicron variant — the budget projections are reasonable. The government is projecting oil prices of $63.50 (WTI $US) by 2023/24, for example, which is not too far off what investors are banking on.

While this is all good news, these short-term gains may unfortunately paper over some significant risks and could distract from solving longer-term challenges. To understand that, we have to first appreciate what's driving the incredible improvements this year. 

The government has one theory: "The second quarter fiscal update is in, and the results are STRONG!" declared a video tweeted by Alberta's Premier Jason Kenney, which added that "Alberta's Recovery Plan is working."

But this is not quite right. 

Alberta's improved fiscal situation has little to do with the government's recovery plan. Very little. 

Instead, the deficit shrank because of unforeseen (though very much welcome) increases in energy prices along with other positive external developments. 

This year, the government anticipates oil prices of $70.50 per barrel — up significantly from Budget 2021's original $46 per barrel. That extra $24.50 per barrel adds up to a lot for a province that produces over 1.3 billion barrels in a year. Natural gas prices are also way up.

Combined, this translates into an extra $8 billion in natural resource revenues this year alone. 

Read full story on CBC
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